PPP Exchange Rates for the Global Poor

T first of the Millennium Development Goals targets global poverty.1 The global poverty number is estimated by the World Bank as a worldwide count of people who live below a common international poverty line. This line, loosely referred to as the dollar-a-day line, is calculated as an average over the world’s poorest countries of their national poverty lines expressed in international dollars; the average is then converted back to local currency to calculate each country’s counts of those living below the line. The counts come from household surveys, the number and coverage of which have steadily increased over the years. The conversion of national poverty lines to international currency and the conversion of the global line back to local currency are both done using purchasing power parity (PPP) exchange rates from the various rounds of the International Comparison Program (ICP). These PPPs, unlike market exchange rates, are constructed as multilateral price indexes using directly observed consumer prices in many countries. This chapter is about the construction of the PPPs and their effect on the poverty estimates. In the first dollar-a-day poverty calculations, the World Bank (1990) used price indexes for gross domestic product (GDP), but this practice was later improved by the use of price indexes for household consumption. Yet even this may be misleading if the price indexes for national aggregate consumption are different from those relevant for people who live at or around the global poverty line. Price indexes are weighted averages of prices, and both weights and prices could be wrong. The prices collected by the ICP, which are average national prices, may be different from the prices faced by those at the poverty line, and the expenditure patterns at the poverty line are certainly different from the aggregate expenditure patterns in the national accounts that provide the weights for the consumption PPPs published by the ICP. This chapter is concerned with the second of these issues, the recalculation of purchasing power parity exchange rates using the expenditure patterns 21